Having your own corporation and being self-employed is a fantastic way to save money on taxes, but the IRS is cracking down on deductions for small businesses. This doesn’t mean there aren’t lots of things you can do, or can still do, but it is now even more important to make sure you have the proper supporting documentation, so that your legally allowed deductions aren’t taken away due to technicalities.
Capitalization Policy & 179 Deductions
Chances are, if you bought any fixed assets in the last ten years, you were able to expense them in the year that you bought them. We never gave much thought to whether something was a capital asset versus something that you could expense because we could expense capital assets up to half a million dollars in one year. But now the rules are going back to where they were: Section 179 deductions are limited to $25,000. This means that you will have to depreciate FAR more stuff than you ever had to in the past. Do you have a written capitalization policy to support your deduction of small tools and equipment? Do you know how to tell when you are repairing (which you can expense) or rebuilding (which you have to depreciate) a piece of equipment? What depreciable life are things going to be depreciated under?
[ ]Create a written capitalization policy to support your deductions
[ ]Re-do tax planning to take the smaller deductions into account
[ ]Make sure that your Fixed Asset schedule is accurate
Auto Use Policy
If you have a business you also have a company vehicle. It is likely that the company pays all the expenses of maintaining that automobile. At least it should be. But does your company have a written auto policy in the employee manual explaining to the employee what the permitted use is? If not, then it is likely the IRS would disallow your auto deductions under audit.
[ ]Add an ‘Employee Auto Use Policy’ to your employee manual
Loans to/from Shareholders
Have you put money back into the company at some point? Have you taken all your distributions out of the company in proporortion to ownership? Have you been running at a loss, funding it from personal money, and taking a deduction on your personal return? The IRS is getting much more strict on allowing loans to and from your company and yourself. Not having them set-up properly could limit your deduction.
[ ]Review equity accounts and loan accounts for accuracy
[ ]Create a promissory note, with interest, for any loans to the company and record these properly in the books
[ ]Create corporate minutes reflecting the company’s decision to take a loan
All of the things above are examples of what the IRS refers to as being run in a business-like manner. “Business-like manner” is the amorphous concept that separates individual rules (where you have to prove every business expense) from the business rules (where the IRS has to prove it ISN’T business). Like I said, being self employed and having your own corporation is an amazing way to increase wealth and your standard of living. But it requires some work!
Have you gotten lax in your separation of business expenses and personal expenses? Time to check your accounts and tighten that up! Maybe there are deductions you have missed! Make sure your weekly, monthly, and quarterly checklists are being completed so your records are in decent shape.
Have you maintained your corporate documents? Make sure your corporate and officer information is correct with the Secretary of State for the the state you set up your business in. Make sure you have minutes showing any major changes (like taking a loan out from a shareholder or changing your company’s auto use policy!).
Have people doing work for you? If they are employees make sure that you have time cards on file and that their employment paperwork is in order and in their employee file. Have independent contractors? Review how you manage those folks and make SURE they are not employees. The 1099 vs W-2 question is a tough one to solve, even tougher to fight, and the IRS is cracking down on it. Consider getting agreements in place that specify a 1099 contractor is in fact independent, and that both you and they understand the difference.
This is all simple stuff that can go a LONG way in protecting you.
[ ]Review personal versus business expense split
[ ]Calendar weekly, monthly, and quarterly books and records checklists
[ ]Check with the Secratary of State to verify information and corporation status
[ ]Prepare minutes noting any major changes
[ ]Review employee files for correct paperwork
[ ]Review Independent contractor payments to verify accuracy
I love helping clients make things as simple as possible. It really doesn’t take much to make sure that you are maximizing your tax situation. A little bit can go a long way to making a big difference!